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Family Savings Act Includes Many Positive Changes for Retirement Plans

In September, the Republican-controlled House of Representatives passed three bills collectively called Tax Reform 2.0 (referring to a sequel to the Tax Cuts & Jobs Act which was signed into law in late 2017). One of the bills, HR 6757 (Family Savings Act of 2018), will likely enjoy broad support in the Senate if it makes it to a vote there. HR 6757 outlines several changes that would be welcomed by employers who sponsor retirement plans and by individual taxpayers. Here is a list of the key features of the bill:

Multiple Employer 401(k) Plans. HR 6757 would make it easier and less risky for small employers (those with less than 100 employees) to join multiple employer 401(k) plans. The new plans are intended to take advantage of economies of scale and the power to negotiate less expensive retirement plan products that are typically available only to larger plans. The “bad apple” rule that currently plagues such plans, under which one employer’s failure to follow applicable Internal Revenue Code provisions and Treasury regulations can result in a loss of tax-favored status for the entire plan, will be discarded. The multiple-employer plan changes would take effect for plan years beginning on or after January 1, 2020.

Extended Deadline for Adopting a New Retirement Plan. Under existing rules, an employer cannot take a deduction related to a given tax year for contributions to a new retirement plan unless the plan has been adopted (i.e., the plan document is drafted and signed/dated by the employer) by the last day of that tax year. Under HR 6757, an employer could adopt a new retirement plan up until the tax filing deadline (including extensions) for a given year and deduct contributions to the plan for that tax year. This change would be effective for tax years beginning on or after January 1, 2019.

Safe Harbor 401(k) Plans. Highly compensated employees are often limited to making small amounts of 401(k) deferrals annually to their 401(k) plan because of ADP testing (a comparison of the rates of 401(k) deferrals by highly compensated employees and all other employees). Employers can avoid ADP testing for a given year if they commit to making a fully vested “safe harbor” employer contribution of at least 3% of eligible compensation for eligible participants.

Currently, an employer must commit to the safe-harbor contribution at least 30 days prior to the end of a plan year (typically the employer’s tax year) to avoid ADP testing and also must generally provide safe harbor notices before the start of each plan year.HR 6757 will extend the deadline for an employer to commit to a safe-harbor contribution until the tax filing deadline (including extensions, if obtained) for the employer and will do away with the notice requirement for the safe-harbor contribution.This change would be effective for tax years beginning on or after January 1, 2019.

Note that employers using a safe harbor matching contribution would still face the annual notice and commitment requirements.

Required Minimum Distributions (RMDs). An RMD is a required annual distribution from a retirement plan equal to a given percentage of a plan participant’s account or benefit. RMDs typically begin at age 70 ½ and the percentage increases as the participant ages. HR 6757 would allow most retirement plan participants to avoid taking RMDs if their account balances or benefits are valued at not more than $50,000. This change would take place beginning with the first calendar year that begins more than 120 days after HR 6757 is enacted.

Relief for Terminating 403(b) Plans. 403(b) plan investments are typically held by a custodian in an account invested in a type of insurance product. These accounts have often made it difficult to terminate a 403(b) plan. HR 6757 would remove some of those difficulties because the custodial accounts holding 403(b) plan assets would automatically be converted to IRAs held for the benefit of participants upon the termination of the 403(b) plan (assuming that the custodian of the account is deemed to be a qualified IRA trustee under IRS rules). This change would impact 403(b) plan terminations that occur on or after January 1, 2019.

Universal Savings Accounts. Individuals would be allowed to contribute up to $2,500 (in after-tax dollars) annually to a tax-favored account. The annual contribution limit would be indexed to grow with inflation. The money in the account could be invested and qualified distributions would not be taxable. Additionally, distributions would not be subject to early-withdrawal penalties that many younger individuals face when they wish to use assets held in a retirement plan or IRA prior to age 59½. These accounts would be available under HR 6757 beginning with the 2019 tax year.

If you have any questions about HR 6757 or retirement plans generally, please contact Jason Douthit at Bullard Law.